At some point, nearly every early-stage software CEO arrives at a crucial make-or-break crossroad as their supply of early capital (cash) begins to dry up. Sensing a pending crisis, a CEO often comes to Corum and asks, “What do you think, should I raise more money, or sell”?
This common scenario generally plays out like this. A technical Founder prototypes a cool new product which attracts a small founding team, and a ‘friends & family’ round is put together to help fund development of the initial product. The F&F round is followed 10-12 months later by an Angel seed round at a higher valuation to grow the team and help launch the product to first revenue. Rarely are the F&F and Angel rounds sufficient by themselves to bootstrap revenue to profitability.
So what are the key factors a CEO should consider in deciding whether to go out for additional capital or begin looking for an exit?
Whether you choose to seek new Capital or pursue M&A, your next stage investors will all be looking for the same things: an innovative technology in a growing market segment with demonstrable and accelerating market adoption. It is the CEO’s job to drive the company towards success in each of those areas.
If the CEO has not been able to develop a working product or develop market traction with accelerating adoption by the time this financial crossroad is reached, the company’s options may be severely limited. Secondary Angels seek momentum opportunities and, like Institutional investors, tend to avoid a company with flat performance. The only exception is when they believe they can leverage the IP better than you have, and/or add significant value through their personal connections. Shareholder dilution from a marginal round can be severe.
CEOs that have been successful with market adoption and revenue growth will have all options open to them, assuming the Capital and M&A markets are still active at that moment in time.
All other things being equal, the decision often comes down to a tradeoff between the additional dilution that will occur to shareholders in a new round, plus the complications of adding yet another investor, versus the increase in valuation that the round should help to produce downstream. Giving up 50% in dilution today to achieve 25% in increased value tomorrow may not be a good tradeoff.
From an M&A standpoint, if the CEO has a strong vision but lacks confidence that they can produce sufficient growth on their own from an additional round, or that to achieve its vision the company needs a larger partner to succeed, then M&A may be the best option.
This is a fairly complicated topic, so we recommend that you talk in confidence with your Corum Advisor for additional perspective on your specific situation.